Exploring:conceiving Value Management1 from my phd thesis2 on innovation. Innovation for the 21st Century. All CC-BY.

Wednesday, January 6, 2016

FTTN vs FTTP (3): is FTTN now better value than FTTP later?

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NBN Co. kindly responded to my analysis, after a Gizmodo request, saying "speed of install and deployment being of greatest importance":

“Our priority is to provide access to the NBN to all Australians as soon as possible in the most cost-effective way with an upgrade path to meet future demand. A faster rollout of the network leads to earlier activations and revenue opportunity.”

“A full Fibre-to-the-Premises rollout will take significantly longer to complete than the Multi-Technology approach. This means delayed revenue opportunity and an inability to take advantage of a ubiquitous network in the next four years.”

Competing Value Demands in the NBN
There are competing value demands in these statements. Let me untangle them. Value types include:
1. Access/Community: to all Australians.
2. Time: as soon as possible
3. Cost: in the most cost-effective way
4. Flexibility: with an upgrade path to meet future demand.
5. Cost/Time: A faster rollout means earlier activations and revenue
6. Time: FTTP is slower to roll out.
7. Time/Cost: Delay in FTTP means delayed revenue
8. Community/Time: lose advantage of a ubiquitous network in four years.

NBN is complex because of these competing value dimensions. A few I can ignore because there is no data to analyse, and estimates are likely to vary substantially. For instance, what is a ubiquitous network worth? How much does a flexible upgrade path cost, both in time, $$ and complexity of systems? What a Government does is set priorities for which type of value is most important. The instructions to NBN Co from the Government set these priorities.

It is possible for me to analyse the Time vs Cost aspects and comment on the "most cost-effective" statement. Two ways of assessing Time vs Cost are: (1) Peak Cash, how much will the Govt have to pay to build and run the network, and (2) Time value of money, that is $100 paid today is not the same as $100 paid in six years time, if you take interest into account you could earn on the money elsewhere.

My previous posts already tell us about Peak Cash. On the figures previously provided FTTP generates more cash than FTTN after six years, if they are installed at the same time.

NB: Also amended figures in first post for a calc error. See original post for details. Overall outcome $ per HH pa appears about the same. There is however a substantial negative effect on FTTN GDP, since both OPEX and Revenue are reduced, doubling the impact on GDP.

1.Peak Cash
From the last post, you can show how much cash is generated by FTTN, FTTP at Yr 10, 20 and based on how much FTTP delay there is (0,2,4,6,8). You can display this graphically to show in which instances FTTP or FTTN is superior.

Negatives in brackets. Rounding. Figures are in $thousands; (Rev - OPEX - CAPEX) total $$ accumulated up until that year. Depreciation excluded. Shaded colour the best performer for Peak Cash.

The table shows, using NBN cash as a proxy for benefit:
- FTTP is superior regardless of delay once reach Yr20.
- FTTN is superior at Year 10 so long as there is four years or more delay to install FTTP
- overall FTTN wins in three scenarios, while FTTP wins in seven.

The same analysis can be done looking at GDP. GDP calculate as Rev + OPEX + CAPEX plus Profit/loss of NBN Co. This reflects total economic activity generated by the NBN. This does not account for multiplier effect (extra benefit through more people using NBN. I have previously estimated that benefit at 1.5% GDP per year. This multiplier is likely to make only a small difference in this case.

Note: ** indicates revised GDP from prior post for FTTN OPEX and Revenue over 1.3, rather than pa. There is a significant impact on GDP, since both Revenue and OPEX are reduced having a double impact.

The table shows, using GDP as a proxy for benefit (undiscounted)(using revised figures):
- FTTP is superior regardless of up to eight year delay, by Yr20
- FTTP is superior at Yr10, so long as delay is no longer than four years.
- FTTN is superior when delay is six or eight years to install FTTP.

2.Time Value of Money
I have updated the model to include a reduction in value of cash the later it is received. So $100 received in ten years is worth less that $100 received today. The difference is the interest rate or discount rate for receiving the money later. I redid the above cash numbers using various discount rates - 0% [same as above], 1%, 3%, 5% and 10%. What rate should be used depends on what the NBN pays to borrow money. Government usually has a lower rate than business. Business could use a 10% rate, while Government might use a 3% rate.

If you discount all the cashflows, a positive cashflow indicates a project worth doing, while a negative would not be. When comparing two projects, you prefer the project with the higher discounted cashflow. I have compared FTTN and FTTP on this basis, and updated the model to include these calculations. This is a bit complex, so there is some chance for error. All errors are mine.